Russia’s new crypto-mining laws challenge Western sanctions

The newly legalized cryptocurrency sector marks a major shift in the Kremlin’s approach to evading sanctions and undermining the U.S. dollar.

The Kremlin has introduced new laws establishing a regulatory framework for cryptocurrency mining (crypto mining), allowing it to validate blockchain transactions and thus to make and receive international payments in digital assets. The experimental legislation effectively reverses a 2020 Russian law which legalized cryptocurrencies yet prevented their use for payment of goods and services, including for international trade.

Russia’s experimental crypto regime

The new law, which came into effect on November 1, sets out the rights and obligations of crypto mining industry players in the country. It also permits Russian businesses and individual entrepreneurs who are officially registered with the Ministry of Digital Development to undertake crypto mining activities.

While larger entities will be required to adopt stricter measures under the law, existing small-scale operators or individuals will be allowed to continue their current mining operations without registration, subject to them complying with certain restrictions such as not exceeding energy consumption limits. Additionally, the law allows for the possibility of banning crypto mining in specific Russian regions or territories. This would allow the government to flexibly manage the industry, matching it with local conditions.

According to the governor of the Bank of Russia, Elvira Nabiullina, the new law will authorize chosen companies to facilitate international payments. The central bank will exercise the authority to prohibit or restrict certain transactions where cryptocurrency is considered a threat to financial stability. Russian companies, exchanges and crypto entities will be eligible to apply to the central bank to become part of what the law refers to as an “experimental” regime. The first overseas transactions in cryptocurrencies are due to occur by the end of this year. By that time, the central bank plans to install the new experimental infrastructure for cross-border crypto payments. Details of this prospective infrastructure have yet to emerge.

Modernizing with the digital ruble

Ms. Nabiullina, who was key to backing the digital financial assets law, has nonetheless adopted a cautious approach in its development, balancing the risks of innovation with preserving the financial system’s integrity. To this end, the legislation also imposes strict controls on the selling and marketing of cryptocurrencies. It forbids provision of cryptocurrencies to an unlimited number of possible users, and restricts the widespread promotion of potentially risky investments in digital assets.

Russia’s crypto mining industry last year became the world’s second largest behind the United States.

In a further act of modernization, the digital ruble, although not a cryptocurrency, will be launched domestically, and will be issued in addition to existing forms of money such as cash. The move will allow Moscow to more securely control and monitor domestic economic transactions. While the law on the digital ruble was adopted in the summer of 2023, its implementation will not begin until mid-2025.

At the beginning of September, a pilot project was launched among a dozen banks, with more lenders expected to conduct transactions in the digital ruble. Its development is a major step in Russia’s switch to an electronically-driven financial system.

Crypto mining also boosts the energy sector

Before this new legislation, Russia’s crypto mining sector had been running unregulated for several years. By upgrading its status to a legitimate activity, the Russian authorities have elevated the industry, boosting its potential of becoming a major economic growth driver. Russia’s crypto mining sector has been increasingly supported by major state companies in both the energy and financial spheres, all of which have struggled under Western sanctions. Among them are oil giant Gazprom Neft, the country’s largest financial institution Sberbank, the world’s biggest aluminum maker Rusal and several other major energy companies. These producers have been able to recover some of their lost income through crypto mining.

Energy companies in particular are happy with the new developments. Running the computers required to conduct crypto mining requires enormous amounts of power, so energy companies receive a great deal of business from crypto companies by allowing them to use their infrastructure. Consequently, crypto miners obtain the electricity to power their mining operations at low costs. In effect, this means that crypto mining converts the energy that Russia is struggling to sell on the international market due to sanctions into cryptocurrencies. Specifically, into Bitcoin, the digital currency on which 95 percent of Russian miners focus their efforts.

Several remote regions across Russia, including Irkutsk, Sverdlovsk and Krasnoyarsk have proven the most rewarding for cryptocurrency mining due to their competitive electricity prices. These regions’ often freezing conditions also enable substantial cost-savings on cooling equipment for their mining platforms.

Largely due to the energy sector and the Russian government’s support for the practice, Russia’s crypto mining industry last year became the world’s second largest behind the United States, having mined around $3.5 billion in Bitcoin. By contrast, the U.S. mined about $9.5 billion of Bitcoin. Previously, Russia ranked third behind Kazakhstan, but that country has now implemented restrictions partly because the crypto mining sector was draining local towns of power.  

Sanctions-busting blockchain

Russian President Vladimir Putin’s bid to establish the use of cryptocurrencies for international trade has been amplified this year by mounting delays in Russia’s cross-border payments for imports.

These delays have been felt in its transactions with major non-Western trading partners such as China, India and the United Arab Emirates. All of these countries’ financial institutions have come under pressure from U.S. secondary sanctions imposed on global non-U.S. banks this year. They have faced problems including delayed or returned payments for certain categories of products and services, not just for dollar-denominated payments, but also those in Chinese yuan and other national currencies. Russia’s central bank has stated that these international payment delays have become a major obstacle for the Russian economy.

Despite the Kremlin attempting to navigate these hurdles by utilizing the currencies of its major trade partners and promising along with China to develop an alternative global payment system outside of the Western-dominated system, many payments for imports are still being conducted through complex circuitous routes. They often have to pass through intermediaries registered in “friendly” countries such as Serbia, Belarus and Kazakhstan to facilitate interactions with Chinese banks and other major trade partners.

However, Chinese banks, in particular, have become more circumspect in conducting settlements with jurisdictions which have been subjected to U.S. scrutiny for enabling the evasion of sanctions: namely, Russia. It is in response to these growing concerns over trade in fiat currencies that Russia’s crypto mining industry has been flourishing.

Pushback by U.S. authorities on crypto dodging

Over the last couple of years, it has become clear that cryptocurrencies are a major part of Moscow’s strategies to evade sanctions. As a result, the U.S. Treasury Department’s sanctions watchdog, the Office of Foreign Assets Control (OFAC), has ramped up its focus on restricting Russia’s cryptocurrency-related activities.

This year, OFAC has blacklisted several cryptocurrency companies and individuals which it claimed facilitated Russian sanctions evasion. The Treasury is urging the U.S. Congress to give it more authority to go after persons that use cryptocurrencies to circumvent sanctions. The Treasury may also look to designate sanctions on Russian cryptocurrency exchanges, miners or similar industry players.

In early 2022, OFAC sanctioned Russia’s largest Bitcoin miner, BitRiver. The crypto mining company operates 15 data centers with an energy capacity exceeding 533 megawatts, and is currently building 14 new centers with capacity of one gigawatt. So far, BitRiver has been the only Russian crypto miner to be sanctioned by the Treasury. However, this may change dramatically as the Kremlin’s new law advances the crypto mining sector, strengthening Russia’s position in this rapidly evolving market.

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